Property Financials

Hi there, Looking at investing in an upper and lower duplex. I'm wondering how others analyze their investment cost. Obviously the down pmt, closing costs, repairs, and inspection are all included in the initial investment, but would reserves for the property also be included. In "How to Build Real Estate Empire" Mark F says to have $10,000 in reserves for each property, should this be calculated as part of the initial investment when calculating cash on cash? Also, when do we draw the line for setting aside money for maintenence and vacancy expenses? If we have $10,000 in reserves do we still set aside 10-30% of the rental income for these expenses, or is there a point where reserves are built up enough and we can stop pulling that 10-30% out of our income? Thanks, Luke

Comments

  • I wouldn't include your reserves as part of the investment. It's working capital, but not a direct cost of acquiring and making the property ready for renting. Mark's calculator doesn't include working capital. I also exclude prepaids and escrows for the same reason in my own calculator. Your reserves could be a general fund that you tap into as needed for a portfolio of rentals. Once you reach a reserve balance you are comfortable with, you should reinvest the extra funds or use it for its intended purpose. It's not doing any good earning 1% interest.
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